Dec. 15 – The State Administration of Tax and the State Administration of Foreign Exchange have jointly issued a circular which provides additional clarification on tax certificate requirements for service industry items and transactions.

The circular expands the list of items that do not require tax certificates, including payments made by contractors for overseas engineering/construction projects, payments to overseas freight forwarders for international air or land transportation, accommodation and traveling expenses paid by domestic travel agencies on behalf of outbound travelers and payments by securities companies of dividends, interest and proceeds derived from selling securities to overseas institutions and individuals.

New requirements for forex transactions
Companies based in China making domestic forex transfers, re-investments or capital increases with mainland China must present tax certificates issued by the in-charge tax authority to be presented to local branches of SAFE or designated banks, including:
- Foreign investors of a Foreign Invested Enterprise (FIE) using dividends for domestic reinvestment or capital increase, or FIEs using capital reserves, surplus reserve or undistributed profits belonging to the foreign investors, to make domestic reinvestment or capital increase;
-Foreign investors using proceeds from early repatriation of investment, liquidation, disposal of equity, and capital reduction to make reinvestment in China;
-Subsidiaries of FIEs paying dividends in forex to the China Holding Company.

Specific outbound forex remittance
The following outbound Forex payments must be supported by tax certificates issued by the in-charge tax bureau:
- Payments to airline companies by domestic travel agencies for air tickets sold on their behalf;
- Remittance of investment gains by qualifying foreign investment institutions (QFIIs);
- Remittance of forex converted from renminbi generated from the sale of A shares or from dividends by a foreign investor who has legally acquired A shares of companies listed on Chinese stock exchanges

Treatment for representative offices of foreign airline companies
Remittance of outbound air tickets sales revenue by the representative office of a foreign airlines (including Hong Kong, Macau and Taiwan-registered airlines) can either be supported by a tax exemption notice issued by the in-charge tax bureau, or a document evidencing mutual tax exemption for international transportation income under an international aviation agreement signed between China and the pertinent jurisdiction instead of a tax clearance certificate.

Foreign individuals
According to the circular, outbound service payments made by foreign individuals shall follow the forex administration rules set for individuals.

Tax certificate issuance and review
Tax certificates should be issued by the in-charge tax bureau and local tax bureau respectively following the settlement of the pertinent China tax liabilities. These shall be reviewed by the designated forex bank to which the payers present the supporting documents for forex payment.

If multiple remittances are required, the banks should note the amounts of payment, dates and apply the bank seal to the original tax certificates and should keep them for a five year period.

For more guidance on forex and tax management, contact Sabrina Zhang, the national tax partner for Dezan Shira & Associates at tax@dezshira.com.